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clean energy and infrastructure

April 2021

Listed infrastructure's crucial role in the clean energy transition

Why clean energy stocks should be considered as part of an allocation to infrastructure.

01

Infrastructure assets for institutional investors

Upgrading infrastructure can boost an economy’s productivity.

Investing in it is equally worthwhile.

As investments, real assets such as power grids and hydroelectric plants tend to provide stable, inflation-protected cashflows. They can also deliver returns that are uncorrelated with those of equities and bonds.

This is why institutional investors with long-term liabilities - pension funds and life insurance companies - have been allocating capital to infrastructure for decades. Over the years, they have accumulated more than USD1 trillion in infrastructure investments, according to the OECD. 

Infrastructure's appeal among this group of investors is likely to grow even stronger in the coming decade. Especially in clean energy. 

With the US, Europe and China about to spend trillions of dollars to deliver a green recovery, a wide range of renewable and sustainable assets are poised for rapid growth, including wind and solar power plants, renewable electricity networks, electric vehicle infrastructure and environmentally friendly building. In time, they will make up the lion's share of new infrastructure assets.

Investors are alert to such trends. In a recent survey, more than 80 per cent of institutional investors said they expected the clean energy sector to be the primary source of infrastructure investments over the next 10 years.1

What investors might not realise, however, is that those opportunities won't be confined to the private markets. They are just as likely to come via listed stocks.

Infrastructure's investment appeal

Broadly speaking, institutional investors allocate approximately 6 per cent of their portfolio investments to infrastructure.

Within that, private assets make up the bulk of such investments (see Fig. 1).

It has proved to be a wise move: unlisted infrastructure has delivered total returns of almost 14 per cent annualised over the past decade.2

Fig. 1 - US pension funds policy asset allocation and current real assets target

 

pension funds AA.png

Based on US consultant view for 2020. Source: NEPC and Verus

While infrastructure investment has generally come in the direct form of private capital, there are good reasons to believe this might not be the default choice in future. In certain sectors, listed infrastructure – public companies that construct, manage and own real assets – are fast-emerging as a credible alternative to direct investment. 

There are several reasons why.

To begin with, there’s a glaring imbalance in the supply of and demand for privately managed assets. In recent years, private infrastructure has become a crowded, and therefore, expensive asset class.

The availability of private and high-quality infrastructure investments has been limited – partly because of the time it takes to design, approve and procure big-scale projects.

Illustrating this, US total public spending on infrastructure was just 2.3 per cent of GDP in 2017, below the average since 1980s of around 2.5 per cent.3

This, in turn, has led to a surge in real assets’ valuations.

Since 2000, valuations for private infrastructure have risen eightfold. That rise eclipses that of listed equities, whose valuations have doubled over the same period.4 All of which dampens real assets’ prospective returns.

This presents institutional investors with a dilemma.

While their appetite for infrastructure is undiminished – some 54 per cent of investors polled by consultancy Preqin plan to commit more to infrastructure in the next 12 months than they did last year – reasonably priced options are limited.

Into the breach comes listed infrastructure, where investment returns have in any case been catching up with those of private investments in the past five years (see Fig.2).

Fig. 2 - Bigger, more liquid

Private and listed infrastructure comparison

comparison table.png

EDHEC Infra 300 index, S&P Global Infrastructure Index, MSCI World Infrastructure Index, MSCI ACWI and WGBI. Source: EDHEC, Preqin, Refinitiv, S&P and Bloomberg, data covering period 10-year period ending 10.03.2021

Listed infrastructure offers several other advantages over more direct forms of investment.

Diversified, liquid, flexible. Compared with direct forms of investment, listed infrastructure companies operate across a range industries, which contain dozens of equity subsectors.5 This gives investors the opportunity to build a more diversified infrastructure portfolio. The public route also affords greater flexibility. Because stocks are liquid investments, investors can easily re-deploy capital in response to economic, regulatory and financial developments that cause changes in asset valuations. This is in contrast to direct investment, where capital tends be locked up for a number of years.

Frequent performance monitoring. Publicly-traded companies are required to post quarterly updates on their sales, earnings and product offerings. Investors can monitor performance of their investments in public markets frequently, in contrast to unlisted firms where certain performance reporting data may not suit institutional asset allocators.6

Better environmental, social and governance (ESG) profile. Listed companies tend to fare better on ESG metrics. Compared with private companies, listed firms are under greater public pressure to improve their performance on ESG. Their response can sometimes be very swift.

Take utility companies’ use of fossil fuels for instance. Since 2005, listed utilities have retired nearly 40 per cent of their coal fleets because of their environmentally damaging profile. This compares with only 20 per cent for private coal power plant owners.

Moreover, the private sector continues to allocate significant capital to coal projects. Nearly 90 per cent of new coal capacity planned in Europe is owned by private firms, while only about 10 per cent of the projects are owned by listed utilities.

While both listed and private utilities continue to operate coal power plants, listed utilities have earmarked around 60 per cent of their remaining fleet for retirement or a switch to emission-reducing fuel. The comparable proportion for private operators is at least 20 percentage points lower.7

02

Under construction: clean and sustainable infrastructure

It is in one area in particular where listed infrastructure is emerging as a viable alternative to its private counterpart: clean energy. 

It's abundantly clear that renewables and sustainability-related sectors will be a magnet for infrastructure investment in the coming years. Both governments and an increasing number of large multinational corporations have committed to ambitious carbon reduction targets in the post-Covid era.

This will require trillions of dollars of capital to be re-directed to clean energy assets. The shift was already gathering momentum prior to the public health crisis. 

In the year before the pandemic, the renewables sector had accounted for the largest share of private-sector infrastructure investment. It drew in more than USD40 billion in new capital in 2019 alone – or over 40 per cent of the total amount invested in infrastructure that year. This is up from 20 per cent at the start of the decade.8

 

Fig. 3 - Mega bucks
Cumulative investment needs under Transforming Energy Scenario (TES) in 2016-2050
IRENA.png

TES refers to aligning energy investments with the need to keep global warming “well below 2C” in line with the Paris Agreement. Source: International Renewable Energy Agency

That looks modest compared with what could unfold. According to the International Renewable Energy Agency, cumulative investments in the energy system will need to increase 16 per cent to USD110 trillion between 2016 and 2050 from what’s currently planned to meet climate targets. 

If that happens, investment opportunities in the electrification and infrastructure segment – which includes power grids, EV charging networks and hydrogen or synthetic gas production facilities – could expand to as much as USD26 trillion by 2050. It is a similar picture in renewables (see Fig. 3). 

 

Public infrastructure: gaining depth

And there are reasons to believe that the public market could attract a significant share of this capital.

The rise of blank-check financiers, popularly known as SPACs (special purpose acquisition companies), is a crucial development in this regard.

SPACs start off with no assets and go public to pool capital with the intention of merging or acquiring targets. They provide a quicker and more efficient alternative for firms to raise capital than through a traditional public listing.  

According to US law firm Vinson & Elkins, the number of announced “de-SPAC” transactions by clean energy companies – or the post-IPO process of the SPAC and the target business combining into a publicly traded operating company – set a record in 2021 while IPOs of energy transition SPACs have been equally robust.

Among the most popular industries targeted by SPACs are electric/alternative fuel vehicles, vehicle autonomy and grid-level battery storage.10

The V&E report adds: “with projected capital requirements to meet carbon goals and deep investor appetite for these investments, activity to date may be but a prelude to even more robust activity over the next decade.”

The average clean-energy SPAC is estimated to have an anticipated enterprise value – a measure of a company’s potential takeover value – of USD1.8 billion.11

Traditional IPOs in the clean energy industry are also strong in some regions. In Spain, partly in response to the EU's green recovery investment plan, at least four companies, including Repsol, are working on possible IPOs of renewable assets this year.

03

Green infrastructure for impact

As the world accelerates efforts to decarbonise and become more resource efficient, listed infrastructure firms specialising in clean energy and sustainable solutions are both a complement and alternative to private assets.

Listed infrastructure stocks, especially in clean energy and sustainable sectors, also allow investors to align their investment return objectives with their environmental and social goals.

Clean energy infrastructure stocks allow investors to align their investment return objectives with their environmental and social goals.

Pictet Clean Energy strategy: investing in energy transition

  • Pictet AM's Clean Energy strategy is ideally placed as a complement for institutional investors looking for exposure in sustainable infrastructure. 
  • The strategy invests in companies supporting and benefiting from the energy transition. It aims to deliver long-term capital growth with a scope to outperform major global equity indices over a business cycle.
  • The strategy invests in broad and diversified clean energy segments, not only in renewable energy but also technologies, innovations and infrastructure supporting smart mobility, energy efficient buildings and efficient manufacturing.
  • Utilities and industrials make up at least 40 per cent of the portfolio.
  • About a third of the portfolio is directly exposed to infrastructure assets and investments, while the remaining has indirect exposure which should also benefit from growing inflows into green infrastructure.
  • The portfolio is nearly 100 per cent exposed to US President Joe Biden’s USD2 trillion stimulus.
  • Launched in 2007, Clean Energy strategy has a track record that is one of the longest in the industry. The experienced team that manage the Clean Energy strategy sit within our pioneering Thematic Equities team that manages around USD53 billion across a range of strategies.

Data as of 31.03.2021